IAS 12 Summary Notes

IAS 12 Income Taxes

CURRENT TAX

DEFINITIONS
Accounting
is profit or loss for a period before deducting tax expense.
profit
is the profit (loss) for a period, determined in accordance with the rules
Taxable profit
established by the taxation authorities, upon which income taxes are payable
(tax loss)
(recoverable).
Tax expense is the aggregate amount included in the determination of profit or loss for the
(tax income) period in respect of current tax and deferred tax (net).
is the amount of income taxes payable (recoverable) in respect of the taxable
Current tax
profit (tax loss) for a period.

CURRENT TAX LIABILITY / ASSET

Current tax for current and prior periods shall, to the extent unpaid, be
Liability
recognised as a liability.
If the amount already paid in respect of current and prior periods exceeds the
Asset
amount due for those periods, the excess shall be recognised as an asset.
Asset – due The benefit relating to a tax loss that can be carried back to recover current tax of
to carry back a previous period shall be recognised as an asset.
Current tax liabilities (assets) for the current and prior periods shall be measured
at the amount expected to be paid to (recovered from) the taxation authorities,
Measurement
using the tax rates (and tax laws) that have been enacted or substantively
enacted by the end of the reporting period.

EXAMPLE 12A
(a) Falcon Limited (FL) taxable profits for year 2011 are $80,000. The tax for the year 2010
was under provided by $4,000 (being shown in trial balance as Income tax (debit)).
(b) Eagle Limited (EL) taxable profits for year 2011 are $100,000. The tax for the year 2010
was over provided by $6,000 (being shown in trial balance as Income tax (credit)).

The tax rate is 30%.

Required:
Calculate the current tax payable (for SFP) and relevant current tax expense (for SPL) for the year
2011.

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IAS 12 Summary Notes

EXAMPLE 12B
(c) Falcon Limited (FL) taxable profits for year 2011 are $ 80,000. During the year 2011, FL
paid $ 15,000 as advance tax and $ 4,000 extra paid due to under provision of tax for the
year 2010.
(d) Eagle Limited (EL) taxable profits for year 2011 are $ 100,000. During the year 2011, EL
paid $ 43,000 as advance tax and $ 3,000 were paid less due to over provision of tax for
the year 2010.
(e) Shaheen Limited (SL) taxable losses for year 2011 are $ 50,000. During the year 2010, SL
paid tax of $ 14,000 on taxable profits of $ 40,000.

Applicable tax rate is 35% in all of the above cases. Assume that under the relevant tax jurisdiction
the carry back of tax losses is allowed.

Required:
Calculate the current tax payable / receivable and relevant current tax expense / income for the
year 2011.

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IAS 12 Summary Notes

DEFERRED TAX

TAX BASE
The tax base of an asset or liability is the amount attributed to that asset or liability for
Definition
tax purposes.
Some items have a tax base but are not recognised as assets and liabilities in the
Important statement of financial position. For example, research costs are expensed and
point charged to profit or loss in the period in which they are incurred (IAS 38) but the tax
law may allow these as expense over a longer period.

TAX BASE CALCULATION

Carrying amount XXX

Less: Future taxable benefits (from recovery of carrying value) (XX)
For all
Add: Future deductible amounts XX
assets
Tax base XXX

Carrying amount XXX

For un-
Less: revenue not taxable in future (XX)
earned
Tax base XXX
revenue

Carrying amount XXX

For other Less: future deductible amount (XX)
liabilities Tax base XXX

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IAS 12 Summary Notes

EXAMPLE 12C
Calculate the tax base for each of the following asset, separately:
(a) A machine cost $100. For tax and accounting purposes, depreciation of $30 has already
been deducted in the current prior periods and the remaining cost will be deductible in
future periods, either as depreciation or through a deduction on disposal. Revenue
generating by using the machine is taxable, any gain on disposal of the machine will be
taxable and any loss on disposal will be deductible for tax purposes.
(b) Interest receivable has a carrying amount of $100. The related interest revenue will be
taxed on a cash basis.
(c) Trade receivables have carrying amount of $100. The related revenue has already been
included in taxable profit (tax loss).
(d) Dividends receivables from a subsidiary have a carrying amount of $100. The dividends are
not taxable.
(e) A loan receivable has a carrying amount of $100. The repayment of the loan will have no
tax consequences.

EXAMPLE 12D
Calculate the tax base for each of the following liability, separately:
(a) Current liabilities include accrued expenses with a carrying amount of $100. The related
expenses will be deducted for tax purposes on a cash basis.
(b) Current liabilities include interest revenue received in advance, with a carrying amount of
$100. The related interest revenue was taxed on a cash basis.
(c) Current liabilities include accrued expenses with a carrying amount of $100. The related
expense has already been deducted for tax purposes.
(d) Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines
and penalties are not deductible for tax purposes.
(e) A loan payable has a carrying amount of $100. The repayment of the loan will have no tax
consequences.

TEMPORARY DIFFERENCES
Temporary differences are differences between the carrying amount of an asset or
Definition liability in the statement of financial position and its tax base. Temporary differences
may be either taxable or deductible.
Taxable Resulting in more tax in future, giving rise to a liability.
Deductible Resulting in tax saving in future, giving rise to an asset.

GUIDE
CA > TB Taxable temporary differences Deferred Tax Liability
Assets
CA < TB Deductible temporary differences Deferred Tax Asset
CA > TB Deductible temporary differences Deferred Tax Asset
Liabilities
CA < TB Taxable temporary differences Deferred Tax Liability

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IAS 12 Summary Notes

MEASUREMENT – TAX RATE

Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to
the period when the asset is realised or the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities shall NOT be discounted.

This is called liability method and is allowed under IAS 12. Another method is deferral method,
which is not allowed under IAS 12 in which tax rates are taken when the temporary difference
arises.

DEFERRED TAX LIABILITIES

Deferred tax liabilities are the amounts of income taxes payable in future periods in
Definition
respect of taxable temporary differences.
A deferred tax liability shall be recognised for all taxable temporary differences,
except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
Recognition (b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).

DEFERRED TAX ASSETS

are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
Definition
(b) the carry forward of unused tax losses; and
(c) the carry forward of unused tax credits.
A deferred tax asset shall be recognised for all deductible temporary differences
unless the deferred tax asset arises from the initial recognition of an asset or
liability in a transaction that:
Recognition
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).
A deferred tax asset is recognised to the extent that it is probable that taxable
Limit profit will be available against which the deductible temporary difference, unused
tax losses or tax credit can be utilized.
At the end of each reporting period, an entity reassesses un-recognised deferred
Reassessment tax assets. The entity recognises a previously un-recognised deferred tax asset
of to the extent that it has become probable that future taxable profit will allow the
unrecognized deferred tax asset to be recovered. For example, an improvement in trading
deferred tax conditions may make it more probable that the entity will be able to generate
assets sufficient taxable profit in the future for the deferred tax asset to meet the
recognition criteria.

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IAS 12 Summary Notes

EXAMPLE 12E
King Limited’s first statement of financial position since incorporation for the year ended December
31, 2011 is as follows (after current tax but before any effects of deferred tax):
Non-current assets $
Land 100
Building 100
Plant 100
300
Current assets
Inventory 50
Trade receivables 40
Cash 20
110
410
Equity
Share capital 200
Reserves (all) 50
250
Non-current liabilities
Long term loan 35

Current liabilities
Trade payables 55
Provision 20
Other payables 50
125
410
(a) The building was purchased for $150 and till now accumulated tax depreciation of $120 has
been charged.
(b) The land is freehold and was purchased for $80 and revalued to $100 during the year. Tax
authorities do not consider revaluation of any asset.
(c) The tax base of provision is nil and of inventories is $60.
(d) Tax base of all other assets and liabilities is equal to their carrying amount.
(e) Unused tax losses are of $20 and applicable tax rate is 20%

Required:
Calculate the deferred tax liability / asset.

EXAMPLE 12F
King Limited’s first statement of financial position since incorporation for the year ended December
31, 2011 is as follows (after current tax but before any effects of deferred tax):
Non-current assets $
Land 100
Building 100
Plant 100
Luxurious car 100
400
Current assets
Inventory 50

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IAS 12 Summary Notes

Trade receivables 40
Cash 30
120
520
Equity
Share capital 200
Reserves (all) 50
250
Non-current liabilities
Long term loan 120

Current liabilities
Trade payables 55
Provision 20
Government grant 25
Other payables 50
150
520

(a) The building was purchased for $ 150 and till now accumulated tax depreciation of $ 60 has
been charged.
(b) The land is freehold and was purchased for $ 80 and revalued to $ 100 during the year. Tax
authorities do not consider revaluation of any asset.
(c) The luxurious car was purchased at start of the year for $ 125 and KL intends to use this
throughout its useful life of 5 years and then dispose of it for a residual value of nil.
Depreciation of car is not deductible for tax purposes. On disposal, any capital gain would
not be taxable and any capital loss would not be deductible.
(d) The provision relates to accrued product warranty costs. For tax purposes, the product
warranty costs will not be deductible until the entity pays claims.
(e) The government grant is not taxable, neither when received nor when it will be charged to
profit or loss. The depreciation of related asset is considered as if no grant was received,
for tax purposes.
(f) Inventories have been written down by $ 10 to their NRV.
(g) Tax base of all other assets and liabilities is equal to their carrying amount.
(h) Unused tax losses are of $ 20
(i) Unused tax credit are $ 5
(j) Applicable tax rate is 20%

Required:
Calculate the deferred tax liability / asset.

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IAS 12 Summary Notes

MEASUREMENT - ADVANCED
Different tax When different tax rates apply to different levels of taxable income, measure
rates using average rates that are expected to apply.
The measurement of deferred tax liabilities and deferred tax assets shall reflect
Reflect the tax the tax consequences that would follow from the manner in which the entity
consequences expects, at the end of the reporting period, to recover or settle the carrying
amount of its assets and liabilities
Present value Deferred tax assets and liabilities shall NOT be discounted.

EXAMPLE 12G
A plant has a carrying amount of $ 100 and a tax base of $ 60. A tax rate of 20% would apply if the
asset were sold and a tax rate of 30% would apply to other income.

Required:
Calculate the amount of deferred tax liability/asset for each of the following cases:
(a) entity expects to sell the asset without further use
(b) entity expects to retain the asset and recover its carrying amount through use.

CURRENT AND DEFERRED TAX CHARGE

Related to Charge to
Items recognised in other Other comprehensive income e.g. tax related to gain or loss on
comprehensive income revaluation should be charged to “revaluation surplus”.
Directly in equity e.g. transfer of incremental depreciation from
“revaluation surplus” to “retained earnings” is made net of
Items recognised directly in deferred tax. Further, change in accounting policy and prior
equity period errors are sometimes adjusted directly in equity and in
such cases the related tax should also be charged directly to
equity.
Business combination Goodwill
Remaining (balancing figure) Profit or loss

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IAS 12 Summary Notes

EXAMPLE 12H
Sohail Limited (SL) had balance of deferred tax liability on 1 January 2011 of $ 15,000.
During the year 2011, the following transaction occurred:
 SL revalued its freehold land and created a revaluation surplus of $ 20,000. Tax authorities
ignore the revaluation exercise.
 SL corrected a prior period error in its financial statements by adjusting opening retained
earnings by $ 10,000. The corresponding intangible assets were also increased by $
10,000. Tax authorities do not allow such type of intangible assets and allow deduction of
the expense in the period expenditure was made.
 SL acquired a business near year end for $ 1,000,000. The acquired business had net
assets of $ 800,000 (carrying amount and tax base). The fair value of the assets was $
900,000 at the date of acquisition. The assets acquired have been included in SL financial
at fair value.

In addition to above transactions, SL had taxable temporary differences of $ 80,000 and

deductible temporary differences of $ 40,000 as at December 31, 2011. The applicable tax rate is
20%.

Required:
Deferred tax liability as at December 31, 2011 including movements for the year

PRESENTATION

Offset of
current tax Only if entity has legally enforceable right and intention to settle on net (or
assets and simultaneous) basis.
liabilities
Offset of
Only if entity has legally enforceable right and asset / liability relates to income
deferred tax
tax levied by same taxation authority on either the same taxable entity or
assets and
different taxable entities who intend to settle on net (or simultaneous) basis.
liabilities

SHARE OPTION SCHEMES

Accounting for share options schemes involves recognising a remuneration

Tax relief on
expense in the income statement throughout the vesting period. However, tax
share option
relief is normally granted at a later date when the options are actually exercised
schemes
giving rise to a deferred tax asset until tax relief is obtained.
IFRS 2 requires that at each reporting period date, an estimate of the future tax
IFRS 2
relief available should be based upon the intrinsic value of the option (= fair
requirement
value – exercise price.)
If the amount of the tax deduction (or estimated future tax deduction) exceeds
the amount of the related cumulative remuneration expense, this indicates that
the tax deduction relates also to an equity item.
Charge
The amount up to related cumulative remuneration expense is charged to profit
or loss and the excess is charged to equity.

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IAS 12 Summary Notes

EXAMPLE 12I
On 1 January 2002, an entity granted 5,000 share options to an employee vesting two years later
on 31 December 2003. The fair value of each option measured at the grant date was $3.

Tax law in the jurisdiction in which the entity operates allows a tax deduction of the intrinsic value
of the options on exercise. The intrinsic value of the share options was $1.20 at 31 December
2002 and $3.40 at 31 December 2003 on which date the options were exercised.

Assume a tax rate of 30%.

Required
Show the deferred tax accounting treatment of the above transaction at 31 December 2002, 31
December 2003 (before exercise), and on exercise.

UNREMITTED EARNINGS

A temporary difference arises when the carrying amount of investments in

subsidiaries, branches, associates or joint ventures is different from the tax base.

The carrying amount in consolidated financial statements is the investor’s share of

Issue the net assets of the investee, plus purchased goodwill, but the tax base is usually
the cost of the investment.

Unremitted earnings (i.e. undistributed profits) in the accounts of subsidiaries,

branches, associates or joint ventures, will lead to a temporary difference.
Deferred tax should be recognised on these temporary differences unless:
 the parent, investor or venturer is able to control the timing of the reversal of
Treatment the temporary difference
 it is probable that the temporary difference will not reverse in the foreseeable
future.

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IAS 12 Summary Notes

ANSWER 12A
(a) FL
Current tax payable (in SFP) $24,000 (i.e. $80,000 x 30%)
Current tax expense (in IS) $28,000 (i.e. $24,000 + 4,000)
(b) EL
Current tax payable (in SFP) $30,000 (i.e. $100,000 x 30%)
Current tax expense (in IS) $24,000 (i.e. $30,000 – 6,000)

ANSWER 12B

Under /
Current Current
Taxable (over) Current tax
Tax period Advance tax
Sr.# profit / provision payable /
rate expense / tax expense /
(loss) prior (receivable)
(income) (income)
years
$ % $ $ $ $ $
(a) 80,000 35% 28,000 4,000 15,000 13,000 32,000
(b) 100,000 35% 35,000 (3,000) 43,000 (7,000) 32,000
(c) (40,000)* 35% (14,000) - - (14,000) (14,000)

*Maximum loss that can be carried back is $ 40,000. The remaining loss of $10,000 shall be
carried forwarded.

ANSWER 12C

(a) (b) (c) (d) (e)

Carrying amount 70 100 100 100 100
Less: Future taxable benefits (70) (100) 0 0 0
Add: Future Deductible amounts 70 0 0 0 0
Tax base 70 Nil 100 100 100

ANSWER 12D

(a) (b) (c) (d) (e)

Carrying amount 100 100 100 100 100
Less: Future deductible amount (100) 0 0 0 0
Less: Revenue not taxable in future 0 (100) 0 0 0
Tax base Nil Nil 100 100 100

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IAS 12 Summary Notes

ANSWER 12E

Carrying Tax Temp. Tax Deferred Liab. /

T/(D)
Asset / Liab. amount base Diff. rate tax (Asset)
$ $ $ % $
Land 100 80 20 T 20% 4 Liability
Building 100 30 70 T 20% 14 Liability
Plant 100 100 0
Inventory 50 60 10 D 20% (2) Asset
Receivable 40 40 0
Cash 20 20 0
Long term loan 35 35 0
Trade payable 55 55 0
Provision 20 0 20 D 20% (4) Asset
Other payables 50 50 0

Unused tax losses 20 20% (4) Asset

Net Deferred tax liability as at December 31, 2011 8

The $4 shall be charged to other comprehensive income (revaluation surplus) and the remaining
$4 shall be charged to profit or loss.

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IAS 12 Summary Notes

ANSWER 12F

Carrying Tax Temp. Tax Deferred Liab. /

T/(D)
Asset / Liab. amount base Diff. rate tax (Asset)
$ $ $ % $
Land 100 80 20 T 20% 4 Liability
Building 100 90 10 T 20% 2 Liability
Plant 100 100 0
Luxurious car 100 0 100 T 20% Note
Inventory 50 60 10 D 20% (2) Asset
Receivable 40 40 0
Cash 30 30 0
Long term loan 120 120 0
Trade payable 55 55 0
Provision 20 0 20 D 20% (4) Asset
Grant 25 0 25 D 20% Note
Other payables 50 50 0

Unused tax losses 20 20% (4) Asset

Unused tax credit (5) Asset

Total DT asset as at December 31, 2011 (15)

Total DT liability as at December 31, 2011 6
Net Deferred tax asset as at December 31, 2011 (9)

Tax base calculation:

Assets
Building $ 100 – 100 + 90 = $ 90 or $ 150 cost – $ 60 accumulated depreciation = $ 90
Land $ 100 – 100 + 80 = $ 80
Luxurious car $ 100 – 100 + 0 = $ 0
Inventory $ 50 – 50 + 60 = $ 60

Liabilities – unearned revenue

Grant $ 25 – $ 25 = $ 0

Liabilities – others
Provision $ 20 – $ 20 = $ 0

Note: Temporary differences arising from the initial recognition of asset or liability are not taken
into account while recognising deferred tax asset or liability.

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IAS 12 Summary Notes

ANSWER 12G
Part (a)
Temporary difference = $ 100 – $ 60 = $ 40 Taxable
Applicable tax rate = 20%
Deferred tax liability = $ 40 x 20% = $ 8

Part (b)
Temporary difference = $ 100 – $ 60 = $ 40 Taxable
Applicable tax rate = 30%
Deferred tax liability = $ 40 x 30% = $ 12

ANSWER 12H

Carryin
Tax Temp. Tax Deferred
g T/(D) Liab. / (Asset)
Asset / Liab. base Diff. rate tax
amount
$ $ $ % $
Land 20,000 T 20% 4,000 Liability – RS
Intangible assets 10,000 0 10,000 T 20% 2,000 Liability – RE
Goodwill 100,000 0 100,000 Note
Acquired assets 900,000 800,000 100,000 T 20% 20,000 Liability – GW
Other 80,000 T 20% 16,000 Liability
Other 40,000 D 20% (8,000) Asset
Net Deferred tax liability as at December 31, 2011 34,000

Deferred tax liability

Date Particulars $ Date Particulars $
31.12.11 Profit or loss (β) 7,000 01.01.11 Balance b/d 15,000
31.12.11 OCI (Revaluation) 4,000
31.12.11 Retained earnings 2,000
31.12.11 Balance c/d 34,000 31.12.11 Goodwill 20,000
41,000 41,000

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IAS 12 Summary Notes

ANSWER 12I

On 31/12/2002
Carrying amount $ Nil
Tax base of liability (5,000 options x $1.2 intrinsic value x ½ years [tax deduction] $3,000
Temporary difference – deductible $3,000
Tax rate 30%
Deferred tax asset $900

Cumulative remuneration expense 5,000 options x $3 FV at grant date x ½ years 7,500

Excess of tax deduction over cumulative remuneration expense 0

Journal entry
Dr. Deferred tax asset $900
Cr. P&L $900

On 31/12/2003 (before exercise)

Carrying amount $ Nil
Tax base of liability (5,000 options x $3.40 intrinsic value x 2/2 years [tax deduction] $17,000
Temporary difference – deductible $17,000
Tax rate 30%
Deferred tax asset $5,100

Cumulative remuneration expense 5,000 options x $3 FV at grant date x 2/2 years 15,000
Excess of tax deduction over cumulative remuneration expense 2,000

Tax on excess $2,000 x 30% - to be charged to equity 600

Journal entry
Dr. Deferred tax asset $4,200 <$5,100 - $900>
Cr. Equity $600
Cr. P&L $3,600

On exercise, the deferred tax asset shall become current tax asset.
Dr. Current tax asset $5,100
Cr. Deferred tax asset $5,100

Dated: 17 August 2016

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